Watch out for the Swiss franc

Swiss watchmakers have reacted to the strength of the franc by raising their prices in the Eurozone, but this is not necessarily bad news for UK retailers, finds TOM DAVIS Swiss watch exports have been soaring in recent years and in 2014 they reached a record high, bringing in a historic 22.2bn Swiss francs. But figures took an uncharacteristic turn for the worse in December last year, falling by 2.5% year-on-year to 1.8bn francs, and just weeks later in mid-January 2015, the Swiss National Bank decided to scrap the minimum rate of 1.20 francs, a three-year old cap, causing its value to soar against the euro. It sent shockwaves through the Swiss watchmaking industry. After the announcement the Swiss currency immediately gained 30% against the euro, before stabilising around 15% higher than it was the day before the announcement. Shares in Switzerland also felt the effects, falling by around 4%. Arguably no industry was likely to feel the fluctuation more acutely than Swiss watchmakers. Whilst no definitive data are yet available, it is thought that Swiss watches sold in the eurozone now cost up to 15% or 20% more to produce. With the majority of Swiss watchmakers’ sales coming from exports, the impact of this change over the coming year could potentially be felt hard. They will either need to increase volumes or increase prices to reverse the impact. Not all optimism need be dashed by the circumstances however: recent figures from the Federation of the Swiss Watch Industry (FH) show that watch exports in January actuall experienced a 3.7% increase, to 1.6bn francs, when compared to the same month in 2014. Good news, but it is hard to tell whether what the cause is or whether it can be expected to last. Jean-Daniel Pasche, president of FH says “We will not focus too much on a [single] month as there can be great differences from one month to the other. The figures of January do not yet completely reflect the decision of the SNB.” He adds: “[There is] no doubt that the recent decision of the Swiss National Bank will negatively affect the Swiss watch industry,” and says that while the impact will differ from company to company, “Swiss brands will have to adapt prices and margins.” What has changed so far? Numerous prominent Swiss watch brands have raised the price of their products in the eurozone following the currency surge and concurrent plummeting euro. Swatch has raised its prices for some of its more expensive brands by 5-7%, such as Breguet and Omega, but has said it is unlikely to do so with its more affordable brands, while Cartier has raised its price in the eurozone by 5% and Philippe Patek by 7%. Interestingly the most obvious price movements are among the luxury international brands, so there is an argument to be made that consumers of a certain calibre will not be put off by a 5-7% price movement. However, if the price rises filter down to the more affordable brands and lines, the consumer response may be more pronounced. "It has a limited impact on the UK, and thus we haven’t increased our prices so far.” Independent Swiss watchmaker H. Moser & Cie, has been affected by the strength of the franc. Chief executive Edouard Meylan says the change has made its products 15% more expensive to produce. “It has affected our business by reducing margins on exports,” he says. “As such, we had to reduce costs. We don’t have big profit margins to play with to absorb this shock, so we have no choice but to slightly increase our prices in Euros. I hope the exchange rate will stabilise at a reasonable level. It has a limited impact on the UK, and thus we haven’t increased our prices so far.” THE UK MARKET Despite the negatives, Pasche says watch exports are expected to remain stable this year compared with 2014, partly because brands can increase prices in the Eurozone but decreasing prices in other parts of the world to counteract the effects on volume. Patek Philippe has done exactly this: reducing price points in the Americas and Hong Kong by 7%. However, this is not necessarily bad news for the UK retailer. Thus far, no watch brands had raised prices of their UK products (at the time of going press), and with prices rising in the eurozone, this can only be good news for UK retailers of Swiss watches. Timothy Barber, editor at QP Magazine, explains: “In some ways it puts the UK retail scene in a stronger position because the pound has been so strong that watches have been more expensive to buy here than they were in Paris, so the lucrative tourist market, for example Chinese shoppers, were going to Paris rather than coming to London. But now there is parity, it may even be a little cheaper here, so that’s good for the UK scene.” This view can only be taken as speculation as things stand, however. If the price rises were to make it across the English Channel, retailers might well turn to alternative brands, particularly those which are British-made. But John Henn, co-director at Wolverhampton jewellers T.A. Henn, is confident that the effects will not be felt here. “We have seen no increase from the lower price Swiss watch that we carry,” he says, “and I don’t really expect to see one.” Thankfully the Swiss franc does now seem to be stabilising as opposed to increasing further, which greatly reduces the likelihood that brands will feel the need to take further reactionary measures. Should it stay put, this will provide some insulation for UK retailers. Barber adds: “I spoke to a couple of people a few weeks ago who were expecting [the price rise to hit the UK], but I think they are expecting it less now.” COMPOUND EFFECTS There is an additional, and potentially exciting analysis to be made here, too. Depending on the future changes in strength of the franc, UK retailers could be real winners in the current scenario. Tourism spend in the UK reached a record high in 2014, up 3% to £21.7bn from 2013, meaning if it is more cost-effective to buy Swiss watches here than in the eurozone, travellers may wait until they are on UK soil specifically for the purpose of buying a watch. "Put all those things together, plus the currency issue, plus the advent of smart watches, and you have a landscape that is not as friendly to a watch market which has really had it very very good for a number of years." In the meantime, there is certainly no easy way out for the Swiss watch industry - this currency scenario is not the only problem it faces. The franc is only a small cog in what appears to be a damaged machine. Barber says: “The Russian economy collapsed, who are huge spenders on watches, the slowing of the chinese market and the Hong Kong riots, which is the biggest market for watches in the world, are all much more serious problems than a strong Swiss franc, because you can adapt to the franc. “At the same time, put all those things together, plus the currency issue, plus the advent of smart watches, and you have a landscape that is not as friendly to a watch market which has really had it very very good for a number of years. It’s just going to be a tougher landscape going forwards, and probably permanently, too.” [alert type="success" main_text="THIS ARTICLE WAS ORIGINALLY PUBLISHED IN THE MARCH 2015 EDITION OF JEWELLERY FOCUS." show_close="false"]